Enis’s Macro Wrap – About Time to Get Bullish

Bulls, it’s almost your time.  I’m officially taking off my bear hat today, and eyeing the bull hat in the corner.  I haven’t put it on just yet, but I’m pretty close to reaching for it.

We’ve had a relatively bearish stance for the past 6 months.  Basically, once revenue and earnings momentum for American companies came to a standstill in the spring of this year, we thought it would be hard for stocks to maintain new highs.  We were a bit early on the macro call.  Obviously wish we had a few losers back.  But our general thesis stands, and it informs our trading bent.

But our 6 month stance doesn’t pay the bills.  Options are a timing game by their nature, and short-term moves can be crucial.  Along those lines, I think it’s about time for a bounce.

First off, there has been a substantial amount of technical damage done.  Enough to give me conviction that 1475 in the SPX index is a long-term top (see here and here).  Yet, the market is down 8% from its peak 2 months ago, and I’m seeing signs from other markets that the risk-off selling might be close to done.

Examples:

  1. Global equity markets, which almost all underperformed the U.S. market over the past 2 years, have been acting much better on the recent selloff.  The Euro Stoxx 50 index is still above its 100 and 200 day ma, and the Hang Seng is still above its 50 day ma
  2. Industrial commodities, specifically oil and copper, are basically flat in the past 2 weeks, while stocks have sold off.  Those 2 commodities in particular signaled coming risk-off action throughout October, and they might be leading stocks in putting in a bottom.
  3. Treasury bonds and the dollar have basically been flat this week, after showing risk-off signals during last week’s selloff.

The main reason why we did not unwind our bearish bets yesterday is that we were waiting for capitulation.  Well, we still don’t sense widespread panic, but there are enough signals otherwise to suggest that the market is due for a bounce.  Overall, taking off the bearish bets here seems prudent. You’ll see me update many trades this morning as a result.

Markets overnight:

  • Asia ex-Japan followed the U.S. into the red.  Japan was up almost 2% (and the yen down 1%) as new elections were called, with traders anticipating a much more aggressive monetary stimulus stance as a result
  • Europe has traded red for most of the session, down 0.5% right now.  SPX futures are flat
  • The dollar is mixed, and Treasury bonds are slightly lower.  Commodities are mixed around unchanged as well.
  • WMT reported weaker numbers, and the stock is trading below the important $70 level in the pre-market.  TGT trading flat after better numbers.
  • Jobless claims and CPI at 8:30 am, and Philly Fed at 10am